The Link Between the Chinese and Australian Property Market

History is busy repeating itself all around the world. Which is another way of saying the same bad stuff is happening everywhere except Australia. Australia’s status as the lucky country is holding as firm as ever. And even the bad news that does come out here doesn’t seem to matter much to financial markets.

Seriously though, what’s the worst thing that’s happened to Australia in the last few decades? We’ve had a bundle of natural disasters. But some economists even reckon they’re a good thing.

More recently, our service sector PMI fell to 48.6 while ANZ’s job ads indicator rose 2.2% in April. Building approvals fell 3.5% for March after a 5.4% fall in February, but are up year on year. Inflation is closing in on the 3% upper target, which is good and bad news at once depending on who you ask. A rate cut isn’t likely anytime soon, especially with the budget proposals discussed so far.

As always, it’s China that makes the Australian share market interesting. HSBC’s manufacturing PMI barely budged to 48.1 yesterday, disappointing the market expectations by a smidge. But the inside story is far more intriguing, as Greg mentioned last week. A Chinese property developer’s extraordinarily bearish speech was leaked.

But now three of Japanese investment bank Nomura’s analysts have officially called the bubble ‘burst’ in public. ‘To us, it is no longer a question of “if” but rather “how severe” the property market correction will be,’ they wrote on Monday. There’s enough discussion of nationalism and racism below to avoid highlighting the fact that a Japanese investment bank was the first to come out with a bearish call on Chinese property.

The analysts also mentioned GDP growth will fall to less than 6% if they’re right about property. If the property bubble bursts, we’d expect a recession in China. Which is apparently a ridiculous idea. Developing economies are supposed to grow, right? Well, remember when the Chinese stock market was a one way bet?

Shanghai Composite Index
 

Shanghai Composite Index
click to enlarge
Source: Yahoo Finance
If that looks familiar, you’re onto something. Japan’s stock market peaked in much the same way in 1990. Back then, Japan was all the rage and Australia’s source of future prosperity. Australian school kids got stuck learning the language of a country now agreed to be in decline. We’ll never forget discovering our friends had to learn Japanese in primary school. It made us laugh with bewilderment.

So what was special about 1990 in Japan? Well, a certain demographic indicator flipped. The same flip struck Australia and China on the cusp of the financial crisis, which is why our stock markets haven’t recovered. More on that soon.

Back to China. Right now the situation reminds us of Our Man in Havana. The book is about a struggling British vacuum cleaner salesman living in Havana in the 50s. He is recruited by MI6 and feeds them fictitious intelligence information while collecting his imaginary informant’s bribes to fund his daughter’s passion for riding. MI6 ends up with the impression the Soviets are building a gigantic superweapon in the jungle. The plans happen to look like a vacuum cleaner.

China’s economy is much the same in many ways. Their export figures don’t match the corresponding import figures from their trading partners. Their economy is designed to meet targets, not demand. And everything is paid for on credit, driven by the government and lining the pockets of those basking in the BS. Economic policy is about how you can siphon off the most money, not making things people want.

As in the book, it will end badly. Just not for those who caused the problem. They tend to escape to avoid having to uncover how deep the incompetence and corruption goes.

What about Australian property? We’d be in as much trouble as China if our property bubble bursts. But the link between the two countries’ property markets might be even stronger than that.

We’ve told you how overvalued Aussie property is many times. And we’ve never convinced anyone one way or the other on the bubble. So let’s look at something slightly different. What’s going on in the Aussie media coverage of Australian property? More specifically, the pictures the Aussie media sticks on top of their articles about property. To put it politely, they very rarely feature any Caucasians. Unless they’re standing on the front porch holding hands behind the auctioneer.

We don’t have a racist or nationalistic bone in our body, after attending international and local schools in four countries. So don’t misunderstand this as some sort of rant. But what is going on at Australian property auctions? Are there really no Caucasian bidders, or is the media fanning the flames?

To lighten the mood on such a sensitive topic, check out this video on the true nature of Australian racism — the kind we fully endorse.

Regards,

Nick Hubble+
for The Markets and Money Australia

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Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.


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